The butterfly effect, a concept from chaos theory, suggests that a small disturbance can have far-reaching consequences. While a butterfly flapping its wings can’t directly cause a hurricane, this metaphor highlights the interconnectedness of complex systems. If we apply this idea to severe weather events like hurricanes, it’s clear that their impact can be felt far beyond their immediate location. The changing weather patterns over the past few decades are undeniable, and the insurance industry is grappling with the increasing frequency and severity of weather-related losses, particularly catastrophic “CAT” events.
Locally, events like the KwaZulu-Natal storms and severe weather in the Western Cape have taught us valuable lessons. Insurers have been forced to re-examine their predictive and rating methodologies, as well as business strategies related to weather perils. However, this has led to new challenges, as accurate forecasting related to climate risk proves to be a difficult task. According to Lloyd’s of London’s Exposure Management Review (Feb 2022), a regional approach to risk management is crucial. Boards should develop frameworks tailored to their regional risks and indicators. For instance, in South Africa, where tornadoes are less common and coastal storms are becoming more frequent, we need to better understand the risks, causes, and impacts of coastal storms and adjust our products and strategies accordingly to address the changing climate.
The butterfly effect takes hold…
As the international market prepares for an increased frequency of region-specific weather peril catastrophic events, reinsurers are compelled to reassess their own models in response.
The insurance industry is deeply interconnected, with large risks often spread across multiple insurers. This means that any potential catastrophic event can have a ripple effect, impacting several insurers and reinsurers, a reality that may not be immediately apparent to policyholders. As a result, local insurers and administrators face reduced capacities and less favorable attachment points, further complicated by the rising cost of reinsurance reflecting the global insurance industry’s shifting sentiment toward climate risk and its impact on the bottom line. According to Reuters, some catastrophe insurance rates rose by as much as 50% in the US market, while other regions like Turkey saw as much as a doubling of their rate.
So yes, a hurricane or other catastrophic weather event on the opposite side of the globe can indeed affect local policyholders, potentially manifesting in the form of higher insurance costs and/or product limitations and exclusions.
Amidst the challenges, the insurance sector has a unique opportunity to thrive. As climate change takes center stage globally, innovative technologies and advancements are emerging. In South Africa, individual solar installations are becoming increasingly popular, while abroad, electric and alternative energy vehicles are being rapidly developed and integrated into the economy. Moreover, large corporations are investing heavily in decarbonization and green energy, with McKinsey & Company estimating that annual global investment in decarbonization could reach $800 billion by 2030. This presents a massive opportunity for the insurance industry to develop tailored products that meet the evolving needs of policyholders, capitalizing on the growing demand for sustainable solutions.
Who knew that a stormy day in Washington could lead to a sunny opportunity for innovative insurance products in South Africa?
The butterfly effect is full of surprises!
Article Written by Jason Arnott | IIG Ambassador Education
